Investors should pay more attention to demographics, says Chris Iggo of Axa Investment Managers. “Globalisation, capital flow arbitrage and the adoption of universal technology and production methods” may have led to a convergence in per capita growth rates in developed countries.
However, economies still “show very different aggregate growth rates with the swing factor being the differences in population growth”. While this is good news for emerging markets with “higher rates of fertility and faster population growth”, it presents problems for more mature economies with “unsustainable long-term public debt ratios”, with Japan and Italy the two most prominent examples.
Some ways to deal with demographic problems are “by increasing fertility rates, allowing more immigration in demographically challenged countries and making it more attractive for people of the right age to enter the workforce”. However, all of these are politically controversial, with immigration in particular “seen as bad”. Therefore it looks like central banks will have to step in with “even more quantitative easing, going to outright monetisation of public debt so that fiscal spending can boost aggregate demand”.
Given the long-term deflationary trend created by ageing demographics, and the fact that “wages are still not growing”, it is amazing that “the Bank of England had three votes for a monetary tightening in June”, says Iggo. Far from returning to historical levels, he thinks that “gilt yields might actually converge on German levels, especially if unemployment starts to reverse later this year or into 2018”.